South Korea - facing the giants

Wednesday, 31 Oct 2012 | 12:01 AM ETFinancial Times

SHARES

Chaebol-bashing is an election ritual in South Korea. But for this year's vote, due in December, campaigns to reform the country's giant, family-run conglomerates are taking centre stage. With economic growth falling to the slowest pace in three years in the latest quarter, and household debt at over 150 per cent of disposable income, Korea's small companies that largely depend on domestic services are struggling against the might of their giant counterparts.

That dynamic should interest investors because Korea's equity markets is largely a reflection of its chaebols. Samsung is by far Korea's biggest family conglomerate. The KrW210bn ($190bn) market capitalisation of its technology giant, Samsung Electronics, makes up almost a fifth of the Kospi's weight. The latter's share price has jumped by a quarter this year on the back of the popularity of its Galaxy smartphone. And Samsung's smaller technology groups are a part of the Galaxy's supply chain - a further 7 per cent of the Kospi index. Other chaebols including Hyundai and LG make up a further third.

But it is the chaebol's opaque ownership structure that also puts a ceiling on valuations. Stocks in Korea have traditionally traded at a 30 per cent discount to Asia-wide indices. Investors question whether their interests are foremost - such as when a company sources from a supplier within the chaebol over cheaper alternatives. In Samsung's case, although the Lee family behind the group owns barely 5 per cent of its main electronics group, the chaebol effectively controls 18 per cent of voting rights through stakes held by other subsidiaries, reckons Citi. Its dominance over the past 50 years have also made things hard for large companies to emerge. Only really NHN Corp has succeeded by becoming an $11bn market cap internet company in just ten years.

If any political attack on chaebols is excessive, this will hurt investors. Short of that, any effort to improve these opaque structures as well as the rights of investors is welcome.